Are you still charging by the hour?

Account management skills ad agency compensation models

In July 2014 the IPA (Institute of Practitioners in Advertising) ran a workshop attended by marketing clients, agencies and procurement to talk about how agencies are compensated.

You can read all the results and highlights from the day here.

One of the stand out presentations came from Tim Williams from Ignition Consulting Group who provided lots of examples of North American agencies who have already moved away from the traditional ‘cost based’ system (charging clients for the number of hours the agency spends) to a value based compensation model.

If you work in an agency where you are only charging clients for how long a job takes, Tim’s presentation might make you think differently and more creatively about how you are compensated.

If you’re short on time, here’s a quick summary with a link to the full presentation at the end:

Value based compensation models

There are three key types of value based compensation models:

1. Fixed price based on perceived value
2. Variable price based on outcomes
3. Dynamic price based on usage

Fixed price based on perceived value

This method of pricing is based on the premise that value exists in the mind of the customer and the price is determined by the perceived value to the client. So the model works by simply asking ‘how much is the client willing to pay’?

Some agencies now offer fixed prices for all their services.

Pricing experts say that fixed prices should always be presented as options e.g. a different price for a bronze, silver or gold level service.

This method of compensation moves the conversation with the client from ‘how long does it take?’ to ‘what option would you like?’.

Tim explains that specialist agencies are particularly successful with this method and cites examples such as Sullivan, a New York based brand engagement agency that offers several fixed price packaged for different levels of service they provide.

Variable price based on outcomes

This method of pricing, although often complex to implement aims for a win/win situation for client and agency.

The agency gets paid in accordance with the outcome of the work produced e.g. Kimberley Clark pays their agency based on shared KPIs (key performance indicators), P&G pay their agencies based on sales, market share and agency performance.

Some agreements are quite straightforward such as a bluetooth brand that pays their agency a royalty on sales and a luxury car brand that pays their agency as a % of every car sold.

Dynamic price based on usage

Dynamic pricing is looking at how you can get paid for the use of an idea rather than on production of a deliverable. It is based on looking at what an agency produces more as a product than a service.

Examples include a healthcare agency that produced an educational video game for their client aimed at diabetic children to help them use an insulin pump. Instead of selling the video game to the client, they licensed it to them.

One B2B agency pays their agency based on each qualified lead generated.

Conclusion

Tim concludes by using an analogy of how we invest in the stock market. You would invest in a mixture of stocks with differing levels of risk to get a much stronger return on your investment.

Agencies could do the same with compensation models they use with their clients i.e. a mixture of low-risk/low reward (hourly rate system), medium risk/medium reward and high risk/high reward (value-based compensation options).

I highly recommend you watch Tim’s full presentation here:

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Tim Williams is founder and Managing Director of Ignition Consulting Group, an organisation that helps advertising agencies and marketing firms focus their positioning strategy, optimise their business model and improve their pricing.

So from what you’ve read, how do you think you could be compensated differently for the work you do with your clients?

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